The following data represents the production possibilities of two people in solv

Question

The following data represents the production possibilities of two people in solving math and economic problems. If they devote their total effort and time to math, A can solve 10 math problems and B can solve 10 math problems. If they devote their total efforts and time to economics, A can solve 10 economic problems and B 5 economic problems. Percent of Resources Devoted to: A B A. Who has the absolute advantage? A B. Who has the comparative advantage? B C. Assume that each will be self-sufficient and devoted half of their resources to math and half to economics. The outcome follows A A B B Alone- no trade Math Economics Math Economics 5 5 5 2.5 Now assume that they specialize according to comparative advantage. How much math and how economics will they produce together? What are the gains from trade?

Explanation / Answer

a) Here, A can solve 10 math problem or 10 economic problem so that the opportunity cost of solving 1 math problem is 1 Economic problem and that the opportunity cost of solving 1 economic problem is 1 math problem

On the other side, B can solve 10 math problem or 5 economic problem so that the opportunity cost of solving 1 math problem is 0.5 Economic problem and that the opportunity cost of solving 1 economic problem is 2 math problem.

A country/firm/person that enjoys absolute advantage in the production of a good must use fewer factors of production than some other comparable country/firm/people. Accordingly, A can solve an economic problem by devoting less time than A so it has an absolute advantage in solving Economic problems while B has absolute advantage in solving Math problem

b) A country is bestowed with comparative advantage when it is possible for it produce a particular product at a lower (opportunity) cost than another country. So A has a comparative advantage in solving Economic problems while B has comparative advantage in solving Math problems

c) When the devote half of their resources, A solves 5 math problems and 5 economics problem while B solves 5 math problems and 2.5 economics problem. A has a comparative advantage in solving Economic problems so it will specializing in solving only economics problem and will be solving 10 problems.

While B has comparative advantage in solving Math problems so it will specializing in solving only Math problem and will be solving 10 problems.

If they trade, the terms of trade should allow trade gains only then trade is beneficial for them. If A solves only economic problem and exports it to B, it expects to B to solve at least 1 math problem for A to import. Similarly, if B exports 1 solutions of math problems to A, then it expects A to solve at least 0.5 economic problems.

In this way, we see that A exports solutions of 2 economic problems and imports solutions of 4 math problems. This way, it gains solutions to 4 math problems and 3 economics problems as a result of trade. Also, B imports solutions of 2 economic problems and exports solutions of 4 math problems. This way, it gains solutions to 1 math problem and 0.5 economics problems as a result of trade.

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